A GUIDE TO QUANTITATIVE EASING

A.The Bank of England says the £200bn of QE between March 2009 and January 2010 boosted the economy by between 1.5 and two per cent – but it also raised CPI inflation by between 0.75 and 1.5 per cent.

Q.WILL IT WORK NOW?

A.It works primarily by increasing the amount of cash in corporate bank accounts – firms sell gilts and receive newly created cash in return, which boosts their liquidity and their propensity to spend and invest the money.

Q.WHO DOES THAT HELP?

A.In theory, this boosts much of the economy by increasing total demand for goods, services and assets. It also helps borrowers by cutting gilt yields.

Q.HOW DOES IT HIT PENSIONERS?

A.Pensioners buy an annuity paying a fixed income. That means they are hit by high inflation. In fact, anyone living off savings – or people without pay rises keeping up with inflation– will have their spending power cut if QE fuels more inflation.

Q.WHAT ABOUT THE GOVERNMENT?

A.George Osborne will benefit from even lower rates of interest on government borrowing. That is particularly important right now because the deficit is so huge.

Q.WHAT DOES IT DO TO OTHER ASSET CLASSES?

A.Gold may rise as investors try to protect their cash from inflation. Also, the falling pound will make commodities sold in dollars more expensive to UK buyers. Liquidity tends to spill over into all asset classes.